Adding Some Definition
The second key to keeping the middle ranks on board is to make the incentive system objective through clearly defined goals and precise definitions of various performance levels. “A lot of the employee reaction to [bonus] differentiation depends on how well you define high performance,” says Watson Wyatt’s Gochman. “If you have the goals very clearly outlined and you can objectively measure them, that’s motivating. But if they seem murky and bonuses depend on who you know, that can be demotivating.”
When Cambridge, Massachusetts-based Forrester Research Inc. moved to align pay with performance ratings eight years ago, employees began requesting more clarity about the ratings. Once bonuses were riding on it, “people began asking what excellence was,” says Tim Riley, chief people officer for Forrester. In response, the company developed competency models that provided standard definitions of excellent, good, and substandard performance for various job types and skills. “We try to take as much subjectivity out of the process as possible,” Riley says.
Now each employee has a quarterly meeting with managers to review past performance against those definitions, set goals, and calculate bonus payouts. Even though some employees will receive no bonus each quarter, while others will get up to 150 percent of the target bonus for that particular quarter, Riley says the system works because “it’s very transparent; people know their objectives and how they’re going to be graded,” to the point that “most employees can sit down and do the math on their own.”
At Idaho Asphalt Supply Inc., in Idaho Falls, Idaho, managers go so far as to spell out criteria for partial bonuses. For example, one company goal is to reduce its cost per ton of materials sold to $15 or less across the board, says CFO Steve Rehnberg. The managers of a plant that starts at $18 per ton would get nothing if they can cut costs by only $1 per ton, but they would get 66 percent of their potential bonuses if they drop to $16. “We try to think about what’s reasonable, but we also draw bright lines,” says Rehnberg. Such detailed scenario-planning ahead of time eliminates potential subjectivity at the end of the year, he says, while still allowing for best efforts to be recognized.
Poor differentiation in pay is often due to a lack of clarity about goals, says Gochman. “If you don’t have confidence that you can explain to people what their goals are and how they performed against them, then you’re going to be worried about this whole fairness issue” and give everyone about the same bonus, she says. It’s still rare for a company to give low-performing employees no bonuses at all.
How to Succeed in Business (If You Really Try)
Once the right semantics and expectations are in place, the best long-term strategy for making all employees feel valued is to encourage career development in a way that lays out a path to the top for those who want to follow it. “The most powerful way to move the middle is through nonfinancial rewards such as career development — rotational assignment, training opportunities, special projects, and more exposure to executives,” says Peter LeBlanc, managing partner of Chicago-based Axiom Consulting Partners LLC. “Those are powerful rewards for everybody, but getting the middle trained and developed also helps increase the chance they can return more knowledgeable and more engaged.”